The US economy has shrunk at its fastest rate since the depths of the recession five years ago as it emerged that the harsh winter took a far bigger toll on activity than previously estimated.

Official data released in Washington showed that output as measured by gross domestic product fell at an annual rate of 2.9% in the first three months of 2014.

But the much worse than expected performance was shrugged off by Wall Street, where shares were up in early trading amid confidence that the economy bounced back strongly once the weather improved in the spring. Optimism was boosted by the latest snapshot of the US service sector that showed the sharpest increase in activity since the survey began four and a half years ago.

Earlier traders in New York had been taken unawares when the Department of Commerce published its third estimate of US first quarter growth. Originally, it was thought output had increased by 0.1% at an annual rate in the quarter ending March but this was adjusted to a 1% decline at the second reading. The gap between the second and the third estimates was the largest on record, with the consensus on Wall Street for growth to be revised down to a annualised fall of 1.7%.

Officials at the commerce department said the downward revision to growth had been the result of lower consumer spending on health care and a weaker than previously estimated contribution from exports.

Nancy Curtin, the chief investment officer of Close Brothers Asset Management said: "The US economy didn't just grind to a halt in the first quarter – it hit reverse as the polar vortex took its toll. But we can't judge current growth by looking in the rear-view mirror, and we are unlikely to see investors react strongly to what is now quite a long way behind us.

"More recent data have pointed to the economy picking up speed. Manufacturing is at a four year high, while the housing market is looking positive once more. It's clear that growth has gone up through the gears in the second quarter, and we'll see this reflected in the next GDP reading."

Gautam Batra, Investment Strategist at Signia Wealth, said: "The bad weather will have played its part, but the figures also raise questions about the efficacy of the Federal Reserve's quantitative easing programme in creating a sustained economic recovery. The Fed faces headwinds to its monetary policy strategy with a cocktail of growing inflationary pressure and weaker than expected economic traction."